Estate Planning Tips for Sole Proprietorship and Single-Shareholder Corporations in British Columbia

By Jennifer Yip and Manisha Aujla, Student Clinicians

Image: Money, Coin, Investment by nattanan23 (Pixabay Content License)

Why Should You Plan?

Your sole proprietorship or single-shareholder corporation has been doing well. It allows you to care for your loved ones and you love operating your business. You hope this will last for many years to come, so it’s hard to imagine a time when you might not be able to continue to do so. 

Maybe you have a will to help provide guidance to your loved ones when you pass. You feel confident and have peace of mind that your will protects your loved ones and ensures your personal assets are distributed according to your wishes. Your family won’t have to deal with as much confusion, stress, or conflict because you have a plan in place.

But have you considered what happens to your business when you die?

What Happens When You Don’t Have a Plan for Your Business?

Sole Proprietorship

As a sole proprietor, your business ceases to exist on your death and your business assets flow to your estate. If you have a will, your business assets will be distributed according to your will. If you die without a will, provincial law will distribute your assets according to government rules. 

Single-Shareholder Corporations

As the single-shareholder of a corporation, your business continues to exist even after you pass. However, unless your business has proper documentation detailing what happens to shares upon the death of a shareholder, your shares flow to your estate. If you have a will, the shares will be distributed according to your will. If you do not have a will, distribution of your business and personal assets both follow the government scheme.

Without a plan for your business, it’s unclear what will happen to it, even if you have a will that handles your shares. Do you want your business to wind down or to be sold? Or do you want it to continue on your death to provide for your family? If so, who will take over and manage the business?

Estate planning with your business in mind and creating a business succession plan allow you to address these questions. Much like personal estate planning, you can leave more to your loved ones and reduce the potential for conflict or litigation.

Things to Consider When Planning

Sole Proprietorship

You may want to incorporate your sole proprietorship so that you can take advantage of the benefits corporations offer for succession planning. Otherwise, you would consider your business assets as a portion of your estate and would plan accordingly for your business assets in your will.

Single-Shareholder Corporations

• Surviving Family Members:
  Are you thinking of passing on your business to some of your dependants but not others? If some children obtain the business, you should consider how your other children would benefit from your estate, and how you might want to make the distributions relatively equal.
  
  

• Picking an Executor:
  Does your executor have the business acumen to distribute your estate in an advantageous manner for your business and your family? An executor who understands your business will help ensure you keep as much as possible for your estate.
  
  

• Financial Obligations:
  Creditors, income tax, capital gains tax, RRSP and RRIF tax, potential tax from a TFSA, probate tax, executor fees, and death expenses, among other things, impact the amount that will be left to your beneficiaries. Planning ahead will help put you in the most tax advantageous position.
  
  

• Business Succession:
  Some key things to consider are who will own and control your business after you pass. Also consider whether your business can continue to be profitable and if your board, where applicable, has different goals for the future. 
  
  

• Other Contractual Obligations:
  Marriage, cohabitation, and separation agreements may also affect your succession and estate planning wishes.

Tools to Help You Achieve Your Plans

• Wills:
  A legally enforceable document that tells those left behind how your property is to be distributed when you die.
  
  

• Trusts:
  This allows assets to be held by a trustee or trustees for the benefit of a specified beneficiary or beneficiaries. A trust may help you reduce tax obligations, avoid litigation relating to your will, and prevent assets from going to your estate.
  
  

• Powers of Attorney:
  A document that gives another individual the power to act as your agent in financial matters. They carry out your wishes and can make decisions on your behalf. You may want to have two attorneys so one can act for your personal affairs and another can act for your business. Your attorney for your business may need to know and understand your business.
  
  

• Buy-Sell Agreements:
  You may want to sell your business instead of passing it on to someone else. This agreement would set out the terms where one owner can buy your ownership share triggered by death, disability, retirement, or more. If you sell your business when you retire, you could take the sale proceeds and enjoy your retirement. When you pass, you would just need to deal with your personal assets.
  
  

• Shareholders’ Agreements:
  If you grow your business and add additional shareholders or want to bring on other investors, you should have a shareholders’ agreement. The agreement would set out the rights and obligations of the shareholders, and ideally would include what would happen to the business and its shares when a shareholder becomes incapacitated, retires, or dies. Your will and shareholders’ agreement should match to ensure your wishes are followed and to reduce conflict.
  
  

• Life Insurance Policies:
  These policies generally give your beneficiaries tax-free funds which can be used to protect your business against loss, cover anticipated financial obligations upon your death, create a legacy for your family or charitable organizations, and more.

Planning for what happens to your business when you pass will help you minimize tax liability and ensure that your wishes are properly carried out. Speak with your lawyer and accountant to determine the best plan for you, your family, and your business.

The University of Victoria’s Business Law Clinic provides free legal information regarding your business questions and can be reached at blc@uvic.ca or (250) 472-4522, located at the University of Victoria, Faculty of Law.